Date Published 11/07/2022
ESG Manco Deadline Fast Approaching
Both managers of UCITS and Alternative Investment Fund Managers (“AIFMs”) (“Fund Mancos”) will be subject from 1st August 2022 to new legislative requirements to take account of sustainability, in terms of both risks and relevant factors, in their operations. In practice this will entail a review of relevant existing policies, procedures and documentation and their revision to reflect these obligations.
Background
The European Commission’s Sustainable Finance Action Plan (the “Action Plan”) was adopted in March 2018 with 3 main objectives: (1) to reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth; (2) to manage financial risks stemming from climate change, environmental degradation and social issues; and (3) to foster transparency and long-termism in financial and economic activity. It is one of the key steps towards implementing the Paris Agreement and the European Union’s agenda for sustainable development. This was further boosted by the “Green Deal” in 2019, which aims at creating a resource efficient society that is carbon neutral.
Key legislative elements of the Action Plan included the Sustainable Finance Disclosures Regulation (“SFDR”) and the Taxonomy Regulation. Documentation pertaining to both UCITS and AIFs will have already been revised to reflect elements of these, with further requirements becoming applicable at the end of this year. However, impact assessments conducted showed the need to ensure that sustainability should be taken into account by Fund Mancos as part of their duties to investors.
Legislative Changes
In order to require Fund Mancos to take sustainability into account legislative measures were adopted in April 2021. Specifically, Commission Delegated Directive (EU) 2021/1270 revises the UCITS Directive (Directive 2010/43/EU) while Commission Delegated Regulation (EU) 2021/1255 amends the Alternative Investment Fund Managers Directive (“AIFMD”) Directive 231/2013, (together the “Revised Measures”). Similar updates apply in both cases.
Key Definitions
The revised measures contain two key definitions – “sustainability risk” and “sustainability factors”, which are both as defined in the SFDR and essentially relate to environmental, social or governance matters.
Practical Implications
The Revised Measures will have a range of implications for the operations of Fund Mancos and will require the updating of policies and procedures to ensure they are reflected. For example, the Risk Management Policy will be required to comprise procedures necessary to assess the risks posed by sustainability issues, in addition to market, liquidity, counterparty and operational risks. Similarly the conflicts of interest policy will need to be updated to ensure it captures those which arise as the result of the integration of sustainability risks in processes, systems and controls, as required. However, there are also requirements that may entail more fundamental change, for example ensuring that Fund Mancos retain the necessary resources and expertise for the appropriate integration of sustainability risks into their processes, assigning senior management with responsibility for the integration of sustainability risks and ensuring that sustainability risks, or where appropriate principal adverse impacts, are taken into account in investment decisions.
Timing
The new requirements apply from 1st August 2022. Accordingly, management companies would be advised to approve revised relevant documentation in advance of that and the boards of UCITS and AIFs should seek confirmations of compliance.